Proposed Spanish Tax Increases ? Can You Avoid Them?

In just a couple of weeks we?ll be welcoming in 2010. As with the start of any new year we?ll wonder what it will bring. Unfortunately, one assumption we can make about next year is that we?ll b

In just a couple of weeks we?ll be welcoming in 2010. As with the start of any new year we?ll wonder what it will bring. Unfortunately, one assumption we can make about next year is that we?ll be forking out more in tax. Here in Spain, VAT looks set to increase, as does the tax rate on savings and investments.

Spain, as we know, has been particularly hard hit by the credit crunch and economic downturn. Property prices have fallen. The construction industry is in disarray. Unemployment is the highest in the EU and climbing. The budget deficit is expected to hit over 8% of gross domestic product next year, much higher than the 3% target for Euro countries. The European Commission has given Spain until 2012 to rein its deficit back in to 3%.

Government spending has overshot budgets as a result of measures to counter the financial crisis and spiralling unemployment benefit payments.

Back in September, Prime Minister Jos?Luis Rodr?uez Zapatero indicated how he would start to balance the books, telling parliament: ?I am going to ask for a share of people?s incomes out of solidarity and to meet the demands of the most needy?.

Just a few years ago, when Spain was booming, Zapatero was able to court the electorate by cutting taxes. But times have changed, and today he is in a position where he needs to raise taxes, whether voters or the opposition party like it or not.

At the end of September his government delivered its 2010 ?austerity? Budget, which included proposals to increase taxation to the tune of ?11 billion.

While the proposals still need to be approved by parliament, Spanish taxpayers need to prepare themselves to pay more tax next year.

On a day to day basis the cost of living would increase thanks to higher VAT rates. The general VAT rate would jump from 16% to 18%, while the special rate applied to services and food production would be 8% instead of the current 7%.

The tax rate applied to savings, investment income and gains would increase from the current 18% to 19% next year. If your total savings/investment income or gains exceeds ?6,000 in a year, then the rate increases to 21% on the excess.

The budget also includes plans to abolish the annual income tax allowance of ?400 for employees, which was introduced only last year.

In an environment when interest rates are so low and unlikely to increase in the near future, these tax increases will impact on many expatriates living in Spain, particularly those with large holdings in bank deposits.

You should also be aware that wealth tax has NOT been abolished. The rate was set at zero, but the tax still exists and can be resuscitated at a moment?s notice

You should not necessarily let the tax tail wag the investment dog by making investment decisions purely to pay less tax. Your wealth management decisions should take both the investment and the taxation aspects into consideration. Overall, your aim should be to protect your wealth and income in real terms, and in such a way that your savings and investments are as tax efficient as possible.

This is especially important at a time when bank interest rates are low; the Sterling to Euro exchange rate is unfavourable for British expatriates and the potential for higher inflation is on the horizon. Reducing your tax liabilities can increase your income and/or your capital growth, which helps maintain the value of your wealth over the longer term.

Likewise, if you have a UK pension which is either deferred or in drawdown, you may be able to reduce the rate of tax that you pay on it to below 2% per annum in Spain ? which again would improve your income.

Other countries besides Spain can expect to suffer tax increases over the next few years. The UK has already announced changes which will make higher earners contribute more of their income to support the state. The middle classes expect to be next in the firing line, especially once the general election is over and the government can stop trying to woe voters and move onto the crucial task of reducing the huge national debt at the same time as meeting its social welfare commitments.

If you are currently tax resident in Spain but may return to the UK, you can take steps now to make your investable assets more tax efficient once you are back on British soil.

Whatever your circumstances, it is always important to get professional guidance from a wealth management firm like Blevins Franks on the most appropriate tax mitigation arrangements for your circumstances.

By Bill Blevins, Managing Director, Blevins Franks

30 November 2009